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Extended Interview: Ronald Sugar, chairman and CEO of Northrop Grumman

May 6, 2008 at 5:55 PM EDT

KWAME HOLMAN: Dr. Sugar, to what extent were you involved personally in this process as the Air Force initiated what we understand to be a new and more vigorous and more regimented acquisition process for these tankers?

RONALD SUGAR, chairman of the board and chief executive officer of Northrop Grumman Corp.: Well Kwame, this is obviously a program of enormous scale, and over the last several years we’ve watched the program. We had interest in the program and as we began to look at it closer and closer we realized that there was an opportunity for us here, in partnership with a provider of a basic commercial airplane.

The two things we had to convince ourselves of before we really decided to go do this was No. 1, did we really have what we felt was a superior offering, in other words, could we provide a superior airplane, and secondly, did we really feel that it would be a fair open transparent competition because as you know there was a lot of press about that, and a lot of concerns. As we look through the process and as we conducted our internal deliberations and discussions with the Air Force, at the end of the day we did conclude that we did have what we thought was a superior offering and that we were fairly well convinced it would be a fair competition. So we decided to go ahead and proceed.

KWAME HOLMAN: … In a competition like this, Boeing has to be considered the odds-on favored going in. Was that the concern?

RONALD SUGAR: Well, certainly the fact that there was an effort to make a sole source award to Boeing previously, … which didn’t end up working out, gave us some concern and we were also not unmindful of political considerations as well. But we are an American corporation, we’re a very respected American corporation. We built the B-2 bomber, the F-14 Tomcat, we have 120,000 employees here in the United States. We’re very trusted by the Air Force. We felt that we had the opportunity to offer something here. We thought that this would be a case where we could actually help the Air Force with the competition. And you know, competition’s a good thing. As you think about, while it’s painful for the participants of course cause there’s always going to be a winner and a loser, the nation gets more out of it and frankly it makes us do better work, too.

KWAME HOLMAN: The award was made and almost instantaneously, as you very well know, there was a process of being taken aback, it seemed, by members on Capitol Hill and by some other constituents, if you will, of Boeing. What was your reaction?

RONALD SUGAR: Well first of all, Kwame, we were delighted to have the announcement. I took the call personally from the Secretary of the Air Force. They told us we had the best plane and they were very pleased that we’re going to be able to move forward on this program because, you know, the Air Force very desperately needs to get on with this program. It really does have a deficiency now in terms of tanking with the aging tankers we have. The entire process was one we’re not, not unexpectedly, there was a reaction.

I would say that what rather puzzled me and first astonished me was that the reaction was apparently visceral because it appears that some would have said, let’s have a fair and open competition but you can’t win. And my gosh, you did win and how could that be therefore it must not have been a fair competition. So at any rate, there was a reaction and that’s understandable.

But I’ll tell you, we watched this process very carefully and I think if any team would have had some reason to be concerned about how the process was conducted, it might have been us and we watched it every step of the way. We watched the interactions, the dialog, the process of specifications, the opportunity to interact with the Air Force. They were very transparent, very clear. Once they issued the RFP (Request for Proposal), everything was fixed and frozen. They did what they said they would do. At the end they were very transparent in terms of how they selected us. And so as a result of that we said, gosh this is, this is terrific. We support it. At the end of the day, we’re a little bit on the sidelines here because the unsuccessful competitor is basically challenging the Air Force, and the Air Force is in a position in the GAO (Government Accountability Office) protestation now to basically defend the details of its process. And we’re in some sense a bystander in this.

Northrop Grumman's airplane

KWAME HOLMAN: Dr. Sugar, in layperson's terms ... what does your plane do and why is it better than Boeing's plane?

RONALD SUGAR: Well first of all, let me say that from everything we can see, both aircraft are good aircraft and I certainly wouldn't in any way say otherwise. But the aircraft we have is a much more modern aircraft. It has more capacity for fuel, of passengers, cargo, it can operate very, very effectively, it can offload more fuel, it can get to the fight, it can take more people back and forth. It just appeared from the evaluation criteria as we were told by the Air Force that we scored superior in four of the five categories. We tied in one, but four of the five categories they felt our offering was superior...

There were hundreds of specific requirements and criteria that the Air Force looked at in making an assessment here. ... They developed a set of mission scenarios which involve various examples of how you go to war with this machine, where do you go in the Asian theater, the Middle East, an African relief mission, what have you, considered even classified missions and as a result of that we're able to look at all the considerations together and have an overall comparison amongst them.

So you can pick one or two criteria and you might say, well gee, you look better on those and therefore you should have won. To me it's like an analogy of a basketball game. There's a hard-played basketball game. The rules were set up, the refs were honest, at the end of the day you can put together some highlight films and show that somebody had a great 3-point shot or a wonderful block, but at the end of the day the game's results speak for itself.

Now with respect to the airplane, one of the interesting features here is because our airplane is so much more capable you don't need as many of them. You don't need as many of them to do the mission. And you don't need to have as many of them frankly on the ramp. And also, you can lift more fuel from a shorter runway, the equivalent amount of fuel from the other guy's airplane on our airplane on, on a shorter runway which is interesting. It's a little counter intuitive.

And finally I would say this argument that theirs is a medium airplane and ours is a big airplane is a little bit disingenuous because both aircraft are generally classified in the commercial world as medium aircraft. In fact, they compete in the world of medium aircraft and in fact one is basically at the end of its life of production the other one that we based our aircraft on, has hundreds and hundreds of future orders and backlog. So I think you see a situation where you have a more modern airplane that's going to be in production for decades to come.

KWAME HOLMAN: [Gen. Ronald] Fogleman says ... 25 feet could be dangerous and that would be the requirement with your larger plane.

RONALD SUGAR: Yeah, well, listen, I obviously cannot challenge General Fogleman's expertise. He's a war fighter. He's been there. But I would say that the hundreds of military officers, Air Force officers and civilians who participated in the last couple of years examining the requirements and the various proposals, the current active folks have come to a conclusion that all things considered, this is in fact the best airplane. So again, I'm in a position of saying the Air Force made that decision, and we're delighted with what they decided.

Given an advantage?

KWAME HOLMAN: What about the charge that along the way the Air Force changed the process a little to help you let it go to a bigger plane (and) Boeing wasn't giving adequate warning?

RONALD SUGAR: Well I, I'm actually kind of astonished by the statements that we somehow knew something they didn't know. This competition, I've never seen anything like this in my four decades in the business in terms of transparency. This thing was spotless in terms of the way they did it. We both knew everything, we both had ample opportunity to interact with the Air Force. They made sure we did, they went the extra mile. We've never seen that on any competition to this extent. In terms of changing things, we have to be a little careful here.

In the process leading up to the finalization of the request for proposal, as part of the transparency process it is encouraged to have a significant dialog back and forth. And the reason for this is that while the Air Force may have certain ideas, they do need to know what's in the art of the possible, from the potential offers it doesn't make sense to put an RFP for something which is totally impossible to do. We also want to make sure that they see the full benefit of what we might be able to provide them as they think about that.

Both companies have had ample opportunity to interact, though in fact, frankly, the competitors had many more years doing this than we have in this particular potential program. At the end of the day though, the requirements then are frozen, they're locked down, the specifications are locked down, the statement of work is locked down, the request proposal comes out, and we then go to work and we proceed. As far as I know, I never saw a single change. We never saw a single change since this thing was locked down. And the Air Force, true to its word went through an evaluation process and came out with what they felt was the right answer.

KWAME HOLMAN: Did you ever say at any point to the Air Force ... look, if you don't change this particular requirement we can't participate?

RONALD SUGAR: We certainly have as part of any process like this, any competition -- as did our competitor -- the opportunity to interact with them and tell them things that we felt would be useful for them to consider and not consider. At the same time we have to make a preliminary bid decision to be able to spend the initial money to do that, and then at the end of the day a final bid decision. You don't reach that final bid decision until you're convinced that you have a basis that you can compete. And as I told you the two criteria were do we really think we had a superior plane? We knew that just having a comparable plane would not be sufficient in this competition, and did we think the process was going to be fair, full open, and would fully value what we had to offer? We came to the conclusion it was and as a result we decided to proceed. Any company has an opportunity to bid or not bid. We certainly made the decision to bid.

KWAME HOLMAN: There are some who are questioning whether you actually flew and tested your plane.

RONALD SUGAR: Well, first of all, the airplane that we have proposed which we call the KC-30 has been built. It has been flown now. It has been tested. A very sophisticated, advanced boom for transferring fuel has been developed. It has been tested. It has passed fuel to F-16 fighters. ... It'll be delivered soon to the Royal Australian Air Force. That is the model that we are putting on the table for this. By the way, the United States Air Force is the fifth air force around the world to now select this particular aircraft design over the competitor for their own air force.

Best I know, while certainly the competitor had very substantial experience in this area for many, many years, a very important experience, I believe the offering they put on the table is not actually the existing airplane but one which is parts of different airplanes and a boom which has not yet actually been built and tested. That I think was a factor in the Air Force's mind. At least that is something that we gleaned from their debriefing of us. I think the Air Force determined that the risk associated with our development process and our ability to get the planes to them faster was superior and that was one of the criteria that they selected us on.

KWAME HOLMAN: How does it feel to have (Washington) Sen. Patty Murray, a member of the Democratic leadership of the United States Senate, saying look, Northrop Airbus EADS is a foreign company, it is taking $40 billion out of this economy and is going to use it somewhere else?

RONALD SUGAR: Well, certainly I have enormous respect for Senator Murray and her position is obviously one that she has the right to take, but let's set the record straight. First of all, this is an American company. The contract is going to Northrop Grumman. Sixty percent of the jobs are going to be here in the United States. Both we and our competitors produce aircraft with significant international content. Both aircraft will be assembled in the final sense in the United States. We will have factories in 49 states supporting this job. We will have 230 suppliers in the United States supporting this job. We will create 48,000 new direct and indirect jobs as a result of this. We are not unmindful of the fact that American content is important and all the critical military modification work, everything that's sensitive will be done in the United States by American citizens, Northrop Grumman people.

As far as the maintenance of the aircraft thereafter, it is a little disingenuous to say that one company is an American company and the other company isn't. If you take a look at how commercial airliners are built today in the world, everybody's airliner has substantial international content. In fact, if you take a look at who purchases American aerospace products, boxes, flaps, struts, wings, landing gear, the largest customer of American aerospace products is Airbus, $10.5 billion per year. If you take a look at the competitors of purchasing around the world, and very rightly so they purchase widely from China. They purchase from Italy, from Japan, other countries, it is a global supply chain. I think it's a little simplistic to say one company's American and the other one isn't, and we're sending jobs, we're not sending jobs overseas. We're taking a commercial airliner off a production line, doing all the additional new work in the United States.

WTO review

KWAME HOLMAN: Senator Murray said several times ... your company is being ... subsidized by the nations of Europe.

RONALD SUGAR: Well first of all, there is an open dispute in front of the World Trade Organization. That suit has not been adjudicated yet. And there are counter disputes. There is a claim that there are subsidies on one side. There's a counter claim that there's subsidies on the other side, not just here in the United States, but with the supply chain and in Japan and other places.

KWAME HOLMAN: You're saying Boeing has U.S. government subsidies?

RONALD SUGAR: The argument that is made by the European Union is that the benefit that Boeing receives from substantial military research and development expenditure does give it basic advantages in aeronautics and other sorts of things. I'm not taking sides on this. I'm just saying that there are different points of view. But that being said, the WTO issue is not a relevant issue for this competition and for several reasons. One is the law which Congress has enacted has never had ever in any competition for military equipment any consideration of WTO disputes or subsidies. So this is not a significant issue. Secondly as I said, if there should be a finding adverse to one company or the other, certainly in our case we will hold the Air Force harmless for any fines that are imposed, so the taxpayers are not going to pay any additional fines.